Estonia’s privatization process was virtually complete by 1996, so only a few industrial enterprises remain for divestiture. Latvia’s large-scale privatization did not start until the mid-1990s, but is now largely complete. In both countries open tenders and direct sales to strategic investors both at home and abroad have been the preferred approaches to privatizing medium-size and large enterprises, because they aim at securing long-run viability. For large enterprises, once a strategic owner has been found, public auctions and offerings are used to divest the remaining state ownership.

Lithuania chose a different strategy, launching a voucher-based mass privatization program as early as 1991 and restricting foreign ownership. This tended to favor enterprise insiders—the employees and managers. Mass privatization was abandoned after the 1996 parliamentary elections in favor of direct sales and tenders. Since then medium- and large-scale privatization has gathered speed and foreign ownership has become increasingly significant. Even so, several hundred companies remain to be privatized.

Open tenders and direct sales tend to instil better corporate governance and stronger financial position in enterprises than mass privatization or insider deals. The presence of foreign investors with greater management experience and access to financing (factors typically in short supply in transition economies) also enhances development of the enterprise sector.

The creation of new private enterprises is also important in building a well-functioning market economy. New enterprises absorb workers made redundant by privatization and restructuring of state enterprises, hence smoothing the transition socially. The emergence of new enterprises has been especially notable in Estonia, where the institutional setting is considered favorable for entrepreneurs. In Lithuania red tape and frequently changing business regulations are identified as major hindrances. Functioning bankruptcy legislation is also essential in imposing financial discipline on the enterprise sector and enhancing the operation of markets. Again, Estonia is at the forefront among transition economies in establishing stringent and effective bankruptcy procedures.

All these factors have contributed to Estonia’s success. It has the lowest unemployment rate in the Baltics and has weathered the effects of the Russian crisis well. Lithuania still has much to do to enhance the functioning of its markets.

As Baltic privatization has entered its last phase—sell-off of large infrastructure enterprises—the process has again become more contested and time-consuming. The most important sectors up for divestiture are energy and transportation. The Baltic economies are heavily involved in cargo transit to and from Russia.

In Estonia the biggest enterprises slated for privatization include the Estonian Railways, the oil-shale-burning power stations in Narva, and the port of Tallinn. Although their privatization has been put off for some time, it is hoped that the railways at least will be sold this year.

Latvia made little progress last year in privatization because of disagreement on methods and friction between politically powerful industrial groups. The sell-off of the two largest remaining infrastructure enterprises—the shipping company LASCO and parts of energy producer Latvenergo—should go ahead this year.

In Lithuania privatization of one of the two state-owned banks is foreseen this year, and the sell-off of the other is under preparation. Restructuring of Lithuania’s heavily subsidized energy sector is long overdue. The government has approved plans for the splitting and partial sell-off of the national gas and power companies. Political resistance to privatization of state-owned assets is rather strong, and the opposition has demanded a halt to the process until after the parliamentary elections in autumn 2000.

To sum up, privatization in the Baltics has now reached utilities production and other monopolized sectors, making the creation of an efficient regulatory framework for securing competition and fair pricing necessary. Guided by relevant EU regulations, this work is under way in all countries.